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Gold sees partial retreat reacting to unexpectedly high US producer inflation and strengthening US Dollar.
US Treasury yields and Dollar Index rise, reflecting a market reassessment of Federal Reserve’s monetary policy.
Retail Sales and Initial Jobless Claims data underscore US economic resilience, weighing on Gold’s intraday prices.
Gold prices trimmed some of their Wednesday gains on Thursday after traders began to price in a less “dovish” Federal Reserve following a hotter-than-expected Producer Price Index (PPI) report. Consequently, US Treasury bond yields rose, underpinning the US Dollar. At the time of writing, XAU/USD exchanges hands at around $2,160.00 and gains 0.50%.
US equities finished the session with losses. Earlier, the US Department of Labor announced that a measure of inflation on the producer side jumped. At the same time, US Retail Sales showed that consumers remained resilient, while people filing for unemployment insurance decreased below the previous reading and estimates.
Uncertainty about the US central bank policy prospects prompted investors to trim their bets that the Fed would cut rates at the June meeting. In the meantime, the yellow metal treads water as the US 10-year Treasury bond yield surges ten basis points from 4.19% to 4.29%, while The US Dollar Index (DXY), a gauge of the buck’s performance versus other currencies, climbs 0.54% to 103.33.
Daily digest market movers: Gold traders on the defensive amid strong USD
The PPI was strong, at 1.6% YoY, up from 0.9%, while the core PPI stood at 2%, unchanged, with both figures exceeding the consensus.
The US Department of Commerce revealed that Retail Sales missed estimates of 0.8% MoM and rose 0.6%, still an improvement compared to the prior month’s reading of -1.1%.
The labor market remained tight as Initial Jobless Claims for the week ending March 9 dipped from 210K to 209K, below estimates of 218K.
Given the backdrop of consumer and producer price indices in the US showcasing reaccelerating inflation, Fed officials should refrain from easing monetary policy.
During last week’s testimony at the US Congress, Fed Chairman Jerome Powell said that inflation is cooling while acknowledging that they could ease policy late in the year. However, he emphasized that it would depend on incoming data reassuring policymakers that inflation is sustainably moving toward the Fed’s 2% goal. The Fed’s next meeting is scheduled for March 19-20 next week.
According to the CME FedWatch Tool, expectations for a May rate cut remain low, having dropped to 11% from 22%. However, the odds for June stand at 64%, down from 72%.
Technical analysis: Gold buyers take a breather below $2,170.00
Gold price remains upwardly biased on Thursday, but it has consolidated near the $2,160-$2,180 area during the last three days, unable to break the top of the range and aim toward $2,200.00. It should be said that the Relative Strength Index (RSI) indicator is about to pierce below the 70 mark, an indication that buyers are losing momentum. In that event, XAU/US could dive toward $2,150.00.
Further downside is seen at the March 6 low of $2,123.80, followed by $2,100.00. A breach of the latter will expose the December 28 high at $2,088.48 and the February 1 high at $2,065.60.
On the other hand, a bullish continuation would happen once buyers reclaim the March 12 high of $2,184.76. The next stop would be the year-to-date high of $2,195.15, followed by $2,200.00.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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